Andy Grewal (Iowa): Whether one believes it a case of a few errors being blown way out of proportion, or a case of a conspiracy from the White House on down, the Tea Party Scandal surely ranks as among the year's top tax stories. The events began strangely, with the disclosure of the IRS mistakes via a planted question at a practitioner conference, and the story continued to take on strange turns, with the pleading of the Fifth by a senior official probably being the high (or low) point. Although the IRS has released substantial information regarding its practices, its refusal to disclose certain documents to the highly respected Tax Analysts organization, and the related lawsuit, could put this story back in the headlines in 2014.

Richard Schmalbeck (Duke): The story was broken by the IRS itself, at a meeting of the ABA Tax Section in May. Lois Lerner, then the director of the Service’s Exempt Organization Division, apologized for subjecting applications for exempt status determinations from Tea Party organizations to special scrutiny. The regretful tone was no doubt intended to mollify critics who had brought this situation to the attention of Congress, and to upstage an inspector general’s report that was about to reveal the “targeting.” But the IRS statements—both from Lerner and from the agency press office—essentially admitted wrong-doing, and offered no reasonable explanation for the IRS actions. They did nothing to defuse the explosive quality of the IRS admissions.

In fact, however, there was a reasonable explanation, to a point. The applications that were singled out for special processing offered some reason to believe that the organizations in question—which were seeking recognition of exemption as “social welfare organizations” under section 501(c)(4)--were better described as “political organizations,” that might qualify for exemption under section 527 instead. After all, many of these organizations had the word “party” in their very name, and section 527(e)(1) defines “political organization” to include “a party . . . .”

The primary difference between the two categories—at least the one that appears to have had the most salience to the groups themselves—is not truly a matter of tax law. Rather, it is that federal election law requires political organizations to disclose the names of their donors, while no such requirement is imposed on social welfare organizations. Confidentiality of donor lists is really what the Tea Party applicants were fighting for.

Of course, an organization is entitled to seek any particular type of exempt status that it believes it qualifies for. And social welfare organizations—the ACLU and the NRA are nice polar examples illustrating the range of this category—are permitted to have and to express viewpoints on public policy issues. But the IRS has an obligation to patrol the borders of the several categories as well as it can; and closer scrutiny of applications that raise facially obvious questions about whether the applicant’s activities really fit within the category they seek to occupy is not merely legitimate; it is one of the duties of the IRS.

True, the IRS bungled this, primarily by choosing search strategies that were nearly certain to put more right-of-center organizations in the line of fire. One wonders how this crisis would have played out if it had simply occurred to the IRS to use the word “party” as a search term rather than “tea party.” The former would catch all the organizations that the latter would, and might snare at least a few organizations with names like “progressive party,” or even “socialist workers’ party” in the high-scrutiny net. Such a search would have been more neutral, and would have had a strong statutory basis founded on the definition of political organization as including “parties.”

“Tea party” was not the only search term, and (it came out much later) at least some of the terms used did identify primarily left-of-center groups for special scrutiny. But it is clear that a substantial majority—estimates run as high as 80%--of the organizations that received special scrutiny were conservative organizations. Needless to say, a wide range of right-of-center interests—in Congress, the media, and the nonprofit sector—were aggrieved, even outraged. And the outrage continues. The last day of the year will be the 236th day of the scandal, a count that will be duly noted in the Tax Prof blog, which will also cite the new set of protestations that occur on that day. (There will no doubt be several; there is something about auld lang syne that brings the grievances of the past year into renewed focus.)

This saga has several distressing aspects. At least a few senior IRS officials have lost their jobs, their reputations, and perhaps more. Opinion polls have reported that a narrow majority of the American public believe that the IRS broke the law in subjecting Tea Party applications to special scrutiny. And even the White House seems to have decided that jumping on the bandwagon of disparaging the IRS is a more prudent choice than defending any part of the IRS efforts to determine as accurately as possible the appropriate categories for exempt status for any particular applicant.

Sound government depends on confidence in the agency that collects the revenue to fund that government. That confidence took a severe blow in 2013. Let’s hope that 2014 is a better year.

Comments

> One wonders how this crisis would have played out if it had simply occurred to the IRS to use the word “party” as a search term rather than “tea party.” The former would catch all the organizations that the latter would, and might snare at least a few organizations with names like “progressive party,” or even “socialist workers’ party” in the high-scrutiny net.

The above doesn't mention how the "caught" organizations were handled.

The ones that like Obama were immediately given the requested status. The ones that don't were not. They were subjected to unlawful information requests and many/most are still waiting for a decision.

Posted by: Andy Freeman | Jan 3, 2014 12:23:13 PM

Note also that the point of disclosing donors is so that the left can target them, which it does quite frequently, something that the right rarely does.